On Saturday, The Australian published a candid column by its Sydney-based senior business reporter, Andrew Main, who questioned the relationship between banks and brokers.
Mr Main asserts that the role of the mortgage broker “seems to have become blurred, in the minds of the banks at least” following the alleged $110 million mortgage fraud that has rocked the industry.
“The old saying that people who ignore the lessons of history are bound to repeat it is a fair reflection on the current mortgage broker scandal and its relationship to the subprime mortgage scandal of 2007 in the US,” writes Mr Main.
“Fortunately it’s not on the same scale — but that’s just good luck at the moment.”
Mr Main points out that both cases – the US subprime scandal and the alleged fraud – involve an intermediary in the “vital relationship between the borrower and the lender of money used to buy property”.
While he notes the direct channel is relatively straightforward in mortgage lending, Mr Main suggests that the role of mortgage brokers can confuse the transaction.
“If you as a retail borrower walk into your bank and negotiate a loan, the relationship is a clear one,” he said.
“There’s no intermediary, they advance the money, you buy the property, and you pay the mortgage until it is discharged.”
While Mr Main admits that many brokers are honest, he draws attention to the alleged actions by some of exaggerating or falsifying details of the borrower’s circumstances.
“That has helped them get a fee, not only upfront of 0.6 per cent or more but also trailing commissions still available of 15 basis points a year,” he said.
“On a $200,000 mortgage, that’s $12,000 upfront and some $3,000 a year.”
Through the broker process, the responsibility for repayment can often seem to have disappeared, writes Mr Main, arguing that the banks do not mind paying commission for business they have not had to chase.
“Home lending in a rising market is cherry pie for banks given they keep title to the house until the last cent is paid out, and Australians are very good mortgage payers by global standards.
“But what is clear is that some brokers appear to have taken advantage of careless bank credit processes, and there are borrowers out there who may well have exaggerated their earnings and assets.”
Mr Main urged the banks to review the files on suspect loans “very early on” and “in very short order”.
“There may never be a bust if property prices don’t drop and the borrowers who’ve allegedly had their finances exaggerated can keep paying their mortgages,” he writes.
Mr Main said that the sooner banks and mortgage brokers restore the "golden thread" of repayment responsibility in a way everyone understands, the less likely we are to see a bust.